Regulation of the water industry Contents


1.The UK has just experienced one of its warmest summers on record.1 The 2018 heatwave and subsequent drought across the UK led to a hosepipe ban in Northern Ireland and drought permits in north-west England.2 Weather fluctuations aside, water supplies will become scarcer: the water efficiency body Waterwise stated that “we can expect more frequent, more intense and longer droughts right across England and Wales in the next few decades” and that rivers were “already drying up”.3 The Committee on Climate Change explained that although “population growth and climate change are projected to have the greatest impact on water resources in London and the south east of England”, the “risk of water scarcity may also increase in the north and the west of the UK by mid-century”.4 The 2018 report Preparing for a drier future: England’s water infrastructure needs by the National Infrastructure Commission (NIC) concluded that increasing drought resilience would “require a twin-track approach combining demand management (including leakage reduction) with long-term investment in supply infrastructure”.5

2.The water industry has also been under pressure this year over supply interruptions after an extreme cold weather event dubbed “the Beast from the East” in February and March.6 The rapid thaw that followed the cold weather led to burst water pipes and over 200,000 customers cut off from supply for more than four hours, with tens of thousands cut off for days.7 Several water companies were criticised by Ofwat, the water industry regulator, for poor planning and response to customers.8 In addition, the water industry has also been in the spotlight over the financial behaviours of large water companies, including public criticism from the Government.9

3.In the light of these challenges facing water companies, we held an inquiry on the regulation of the water industry to explore whether the current system is still fit for purpose, almost 30 years since the industry was privatised. We launched a call for evidence on 9 May 2018, and invited written submissions on the following terms of reference:

a)Is regulation of the water industry improving outcomes for consumers and the environment?

b)Is the water industry adequately delivering a “twin-track approach” of increasing water supplies and reducing water demand?

c)How can innovation be increased in the water industry?

d)Are penalties and enforcement mechanisms encouraging responsible behaviour?

e)Are there any potential benefits for the environment that could be achieved though regulatory divergence post-Brexit?10

We received around 40 written submissions and held four evidence sessions including witnesses from environmental groups, water companies, regulators and Defra. We would like to thank everyone who provided written and oral evidence to our inquiry.

Water companies and regulators

4.The water industry comprises a diverse range of companies providing various services. There are currently nine large companies in England that cover specific geographical regions and provide both water supply and sewerage services.11 There are also several smaller, local water and sewerage companies.12 Twelve companies provide water but do not provide sewerage services.13 England is the only country to have fully privatised its water and sewerage system.14 Although private, Dŵr Cymru/Welsh Water is owned by a single-purpose company without shareholders.15 Water and sewerage services in Scotland are provided by Scottish Water, a publicly owned company that is economically regulated by the Water Industry Commission for Scotland (WICS).16 Northern Ireland Water is a Government-owned company.17 In addition to the companies that physically supply water and sewerage services, the industry includes water retail suppliers which provide customer-facing services, such as billing, to non-domestic consumers.18

5.The water industry in England and Wales was privatised in 1989. However, customers, with limited exceptions, cannot choose their water company. As such, most water suppliers are regional monopolies that supply customers in their region by default, thus making market competition impossible without intervention. Therefore, the economic activities of water companies in England and Wales are regulated by the Water Services Regulation Authority, or Ofwat, whose predecessors were established when the industry was privatised.19 Ofwat is a non-ministerial Government department that is financed by licence fees from water companies.20 Ofwat’s duties originate from the Water Industry Act 1991 and include promoting competition, protecting the interests of consumers and ensuring that water companies carry out their statutory functions and licensed activities properly.21

6.Defra and the Welsh Government guide Ofwat via strategic policy statements.22 The environmental activities of water companies, such as abstraction and sewage discharge to the environment, are regulated by the Environment Agency and Natural Resources Wales. Drinking water quality is regulated by the Drinking Water Inspectorate (DWI). The roles of key regulatory bodies are summarised in the table below.

Who regulates the water industry in England and Wales?23


Regulatory role

Defra and Welsh Government

Set the overall water and sewerage policy framework in England and Wales, including setting standards, drafting legislation and creating special permits (for example, drought orders)

European Union

Sets European water, wastewater and environmental standards

Ofwat (England and Wales)

Promotes competition, sets price limits, ensures that water companies can finance and properly carry out their functions, promotes economy and efficiency

Environment Agency (England) and Natural Resources Wales

Regulate water quality and industry waste, work with partners to reduce flood risk and promote sustainable development

Drinking Water Inspectorate (England and Wales)

Checks that water companies supply water that is safe to drink and meets the standards set in the Water Quality Regulations, by carrying out inspections and checking tests that water companies carry out on drinking water

7.Ofwat regulates the water industry by setting “the price, investment and service package that customers receive”, which includes “controlling prices companies can charge their customers” through price reviews.24 In doing so, Ofwat attempts to “balance consumers’ interests with the need to ensure the sectors are also able to finance the delivery of water and sewerage services” as well as ensuring “they are able to meet their other legal obligations, including their environmental and social duties”.25 Through the price review process Ofwat puts pressure on water companies “by mimicking the penalties and incentives they would be exposed to in a competitive market”.26 The current price review, PR19, will set “wholesale price controls for water and sewerage companies for 2020 to 2025”.27 Ofwat published its draft PR19 methodology in July 2017 and water companies submitted their business plans to Ofwat in September 2018.28 Ofwat will assess company business plans in early 2019 and set final price limits in December 2019.29

8.PR19 was a key focus of our inquiry and is a recurring theme throughout our Report. Because of the importance of drought resilience, the first two chapters of our Report are structured according to the twin track approach for managing water: Chapter 1 looks at increasing supply through abstraction and water transfers; and Chapter 2 examines demand reduction, including metering. Chapter 3 examines the performance of water companies and Chapter 4 explores competition in the sector, with a focus on the water retail market. Our overall conclusions on the regulation of the water industry, including PR19, are in Chapter 5.

1 Met Office, Summer 2018: a possible record-breaker?, August 2018

2 Northern Ireland Water, Hosepipe Ban Northern Ireland, June 2018; Drought permits allow for more water to be taken from the environment by a water company; see United Utilities, Drought permits and orders, July 2017

3 Waterwise (RWI0019) para 8

4 Committee on Climate Change (RWI0006) para 1

5 National Infrastructure Commission, Preparing for a drier future: England’s water infrastructure needs, April 2018, p 3

9 Department for Environment, Food and Rural Affairs, A water industry that works for everyone, March 2018

10 Environment, Food and Rural Affairs Committee, Regulation of the water industry inquiry launched, May 2018

11 Anglian Water, Northumbrian Water, Severn Trent Water, South-West Water, Southern Water, Thames Water, United Utilities, Wessex Water and Yorkshire Water

12 For example, Albion Water, Independent Water Networks, Peel Water Networks, SSE Water, Thames Water Commercial Services and Veolia Water Projects

13 Affinity Water, Bournemouth Water, Bristol Water, Cambridge Water (South Staffs), Cholderton and District Water, Dee Valley Water, Essex and Suffolk Water (Northumbrian), Hartlepool Water (Anglian), Portsmouth Water, South East Water, South Staffs Water and SES Water

15 Dŵr Cymru Welsh Water, Company information, accessed September 2018

16 Scottish Water, How the water industry is run in Scotland, accessed September 2018

17 Northern Ireland Water, About us, accessed September 2018

18 Ofwat, Business retail market, accessed September 2018

19 Ofwat, Water sector overview, accessed September 2018

20 From 2015–16, the amount Ofwat is allowed to recover through fees is set by Government as part of the Comprehensive Spending Review; see Ofwat, Ofwat’s five-year business plan: 2015–16 to 2019–20, accessed September 2018

21 Ofwat, Our duties, accessed September 2018

22 Ofwat, Our duties, accessed September 2018

23 Ofwat, Water sector overview, accessed September 2018

24 Ofwat, Price reviews, accessed September 2018

25 Ofwat, Price reviews, accessed September 2018

26 Ofwat (RWI0016) para 15

27 Ofwat, Price reviews, accessed September 2018

28 Ofwat, Price reviews, accessed September 2018; Ofwat, Business plans, accessed September 2018

29 Ofwat, Price reviews, accessed September 2018; Ofwat, Business plans, accessed September 2018

Published: 9 October 2018